LATEST UPDATE: On April 14th 2021, Madoff died at the Federal Medical Center in North Carolina, after suffering from chronic kidney disease.
Bernie Madoff became infamous for massive securities fraud in 2008. His name is now synonymous with it. He was a pariah amongst his family and friends. Madoff started his career as a penny stock trader in the 1960s and eventually built this into a very successful and profitable electronic trading business. In the early 1990s, he established a reputation for himself in the industry and even served as the chairman of the NASDAQ exchange. This is around the same time he claims to have started the Ponzi scheme. Madoff offered what investors coveted, that holy grail combination of low risk and high returns. But these traits are fundamentally at odds with one another. It’s just not possible for anyone to go 10 to 15 years with such consistent returns and so few months in the red. Madoff was cunning to only claim returns around 10%, which helped him keep the fraud going. His numbers weren’t outlandish enough to attract as much scrutiny as other Ponzi schemes had before. He rejected any calls for outside audits for “reasons of secrecy,” saying, “This was the exclusive responsibility of the chief compliance officer,” who just happened to be his brother.
In 2008, as the financial crisis worsened, Madoff was powerless as the scheme started to unravel. Redemption requests ramped up after Bear Stearns declared bankruptcy in March and skyrocketed when Lehman Brothers suddenly collapsed in September. He was really struggling to keep the business afloat and, by Thanksgiving, he realized that he just couldn’t do it any longer. When he suggested to his sons that they pay out bonuses early that would exhaust most of the $200 million left, his sons asked how they could pay bonuses if they couldn’t pay the investors. Madoff then admitted it was all a big lie, which prompted his sons to report him. Paper losses of nearly $65 billion, cash losses around $17 billion, and tens of thousands of duped investors, including celebrities, pension plans, and charities. Madoff was responsible for the largest private Ponzi scheme in history.
In 2009, he pled guilty to all criminal charges and was sentenced to the maximum of 150 years in prison, as well as mandatory restitution of $17 billion. To date, Madoff investors have recovered almost 13 billion for nearly three quarters of their original investments. While the circumstances that allowed this fraud to go on for so long were rather exceptional, it reminds us of the old adage that if something seems too good to be true, then it probably is.